Despite lower feed costs, flagging demand will likely continue to depress prices and producer profitability in 2009. A lower milk-feed price ratio suggests that weaker prices hold the upper hand over lower feed costs and are pressuring profitability. The U.S. dairy herd is forecast to decline modestly during in 2009 and to average 9.2 million for the year. Output per cow is forecast to inch upward to 20,620 pounds per cow in 2009, less than a 1% increase over 2008 and the second year of about a 1%growth rate in yield, after adjusting for the 2009 leap day. Despite the lower herd size, the slight yield increase will nudge milk production up to 190.5 billion pounds in 2009, compared with 189.6 billion in 2008. Although down from mid-year peaks, corn prices remain relatively high, while milk prices have dipped. This divergence of feed and milk prices has left dairy producers with a seriously deteriorating profit situation. The milk-feed price ratio in 2009 is forecast to be the lowest since the 1980s.
In light of the recessionary economy, domestic demand is expected to weaken. Restaurant sales are down, and sales of value-added and premium products have also fallen. To the extent that dairy products fall into these categories, demand will be affected. On the other hand, if dairy products become a larger portion of meals consumed at home, there may be some support.
Production in 2008 of all major dairy products, except whey, are above year-ago levels, and inventories are high. The central problem is that domestic demand is insufficient to absorb the increased production, and export prospects are dim. Global recession, higher production abroad, and a stronger dollar are expected to combine to curtail dairy exports in 2009. Commercial exports are projected at 6.7 billion pounds (fat basis) in 2009, a drop from 9.1 billion estimated for 2008. On a skims-solids basis, exports are projected at 23.5 billion pounds this year compared with an estimated 26.5 billion in 2008. Lower prices will likely prompt some additional domestic commercial use in 2009.
Prices for dairy products are sharply lower and will remain so into 2009. Recovery for most products is not anticipated until mid-year. Nonfat dry milk (NDM) producers have shifted production from export to sales to the Commodity Credit Corporation (CCC). Butter movement into CCC has already begun, and some cheese sales to CCC are expected. Higher prices will depend on lowering production to be more in line with demand. Milk Income Loss Contract payments to some producers will boost farm income, but could slow production adjustment.
Dairy product prices will be lower in 2009. Cheese prices are forecast at $1.260 to $1.340 per pound in 2009, down from $1.895 in 2008. Butter prices are forecast at $1.160 to $1.270 per pound this year, compared with $1.436 last year. NDM prices will likely average between 84.0 and 90.0 cents per pound, down from an average $1.226 per pound in 2008. Dry whey prices dropped in 2008 and are forecast to decline further, averaging 18.0 to 21.0 cents per pound in 2009 after averaging 25.0 cents per pound last year. Some price recovery could come in mid-2009, but is largely dependent on adjusting milk production to weaker demand prospects.
Milk prices will decline this year in the wake of product price declines. The Class IV price is forecast to average $10.00 to $10.90 per cwt this year, down from 2008’s $14.65 per cwt average. The Class III price is forecast to average $10.60 to $11.40 per cwt, down from $17.44 per cwt last year. The all milk price is expected to average $11.80 to $12.60 per cwt in 2009, a drop from $18.34 in 2008.
Source: Livestock, Dairy, and Poultry Outlook, USDA